Sucheta Dalal :Frustrating Pace Of Investigation
Sucheta Dalal

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Frustrating Pace Of Investigation  

Aug 9, 2004


A decade of complaints about botched investigations and deliberate delays in punishing wrong doers


The effects of the Ketan Parekh scam continue to ooze out of different corners of the financial market. Two weeks ago, Global Trust Bank was placed under a moratorium and last Saturday, the Central Bureau of Investigation (CBI) raided a senior official from the Securities and Exchange Board of India. This official has been facing an on-going investigation that began after the Scam of 2000, in connection with handling the Calcutta stock exchange crisis. A couple of months ago, another SEBI official was suspended a second time after CBI officials had followed up complaints against him.


The last time that the CBI had raided SEBI officials, before these incidents, was nearly ten years ago, in connection with MS Shoes East Ltd. CBI had then alleged a criminal conspiracy between SEBI officials and the promoter of MS Shoes, who had tried to take advantage of the primary market mania to raise public funds at ramped up stock prices. But CBI had barked up the wrong tree at that time and the officials who were harassed had a reputation for integrity. After that, the CBI again investigated another official in connection with the collapse of the CRB group. Then again, the investigation was not credible because it failed to target the one person in SEBI who was very close to the notorious CR Bhansali.


Does the CBI have better evidence this time? Will the raid lead to action, or will it be another gimmick that peters out over time? Or, will the action damage SEBI’s credibility more severely, because it follows a decade of complaints about botched investigations and deliberate delays in punishing wrong doers?


Reaction to the CBI action is curious this time. Although nobody has any details about the raid, there is a sense of glee among investors and intermediaries that SEBI officials are being questioned by another investigative agency. This only seems to underline the frustration at the pace and direction of SEBI’s investigation. Here are some recent examples of SEBI’s slothful ways.


 • Will CBI’s recent raid lead to action, or will it be another gimmick?

• In fact, there is no record of any harsh action taken against mutual funds

• What’s more, will SEBI act on the 15 large brokers active on May 17?


Excess Shares: Around 2000-01, when companies were forced to dematerialise their shares, several unscrupulous promoters hit on a dubious way of making money by issuing shares far in excess of their issued capital. The scam was simple. Since dematerialised shares have no distinctive numbers, the mischief wasn’t easily detected once shares were credited to investors’ account. SEBI did take steps to block this, but did anyone hear of the promoters of these companies being punished or debarred? It has not happened.


Physical allotments: Similarly, it will soon be a year since hundreds of investors complained about being allotted physical shares by two nationalised banks — Indian Overseas Bank and United Commercial Bank, even when they had filled up their application forms correctly and asked for an electronic credit. SEBI conducted an inspection of registrars and transfer agents and senior SEBI officials told us that they had detected massive wrongdoing. In February this year, SEBI executives told a meeting of investor groups that stringent action against the registrars would be announced soon. Nothing has happened. Instead, the weak infrastructure of the registrars was badly exposed during the 6 PSU offerings in March this year that ended in a huge allotment fiasco. Even here, SEBI quickly set up a committee to assess the quality of primary market infrastructure, but has yet to announce any action against the registrars and transfer agents. One of the registrars had been previously investigated in the bank allotment case. Isn’t there reason to suspect that the delays are deliberate? This is a clear case, where investors would like some pressure to ensure that SEBI directly fulfils its regulatory responsibilities towards retail investors who have been repeatedly battered by scams.


Mutual Funds: SEBI’s investigation of mutual funds has always been considered weak and inadequate. Every few months we have rumours about fund managers who are shunted out of their jobs, under pressure from the regulator; some of them have been transferred out of the country and others simply switched jobs. The complaints range from front running by fund managers, favouring corporate clients at the cost of retail investors and supporting dubious companies through investments.


It was recently found that many so-called schemes were nothing but portfolio management schemes with less than five investors and sometimes even a single investor. Again, there is no record of any harsh action taken against mutual funds, and in the occasional case where hefty fines have allegedly been imposed, the regulator had not posted the details of the wrong-doing or the fine on its website.


May 17: Finally there is the investigation into the May 17 phenomenon, where the market collapsed a stunning 10 per cent in just ten minutes and triggered incredible panic. Clearly, whoever sold heavily during the first few minutes of trading that day, set the panic in motion. And SEBI has to focus on sellers during those few minutes. Yet, SEBI claims that the investigation report is still being finalised. On the other hand, my sources say that a report has already been submitted to the government but is being kept under wraps. Meanwhile, I have access to data on the crucial first five minutes of trading. And guess what, it throws up just around 15 large brokers. Of these, around eight are foreign brokers or large Indian firms that trade mainly for FIIs. Two others are brokers who provide the biggest platform to day-traders. And one firm belongs to a high profile, high networth investor. Another brokerage firm, that allegedly fronts for some scamsters also shows up on the list. Why is it so difficult for SEBI to draw even interim conclusions after over two months? And is there any point to their actions after such long delays? Where CBI would play a role is in checking if these delays are deliberate and motivated or mere incompetence.


—Email: [email protected]

-- Sucheta Dalal